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There has been a significant rise in claims nationwide stemming from loan fraud. The victims include lenders, mortgage brokers, and individuals. Most forms of loan fraud are unrelated to title insurance or escrow procedures. The victims may attempt to hold the closing agent responsible for their losses. Our home office has recently put together an informational bulletin that may help you identify, and hopefully avoid, potential loan fraud transactions. This article summarizes that bulletin.

Loan fraud schemes frequently involve an inflated property appraisal. The inflated appraisal is used to obtain a mortgage loan in a larger amount. The larger loan enables a buyer to acquire a property with little or no equity, or to provide cash to such buyer at the closing. These schemes are sometimes associated with other factors. The following situations require closer attention:

A. The "seller" named in the contract is not the record owner of the property.

B. The "buyer" named in the contract is not the person or entity that will ultimately acquire the property (the ultimate buyer).

C. The contract is amended to change the sales price.

D. The buyer receives cash at an acquisition closing.

The above situations may be legitimate and innocuous. However, if you become aware of any of these factors, notify the lender in writing, and obtain the lender's written acknowledgment of the facts and the lender's authorization to proceed with the closing. To the extent practicable, obtain the lender's acknowledgment and authorization, rather than that of the mortgage broker.

Flip Transactions

One form of loan fraud involves a flip transaction. A flip transaction is not necessarily fraudulent or illegal. A legal flip transaction involves a buyer (an "intermediary") who locates a property at a particular price and finds another buyer willing to pay a higher price. The intermediary may execute a contract or an option to purchase the property and assign its right to purchase the property to the ultimate buyer, or the intermediary may acquire the property and thereafter convey it to the ultimate buyer. The transactions often take place simultaneously or in rapid succession.

An illegal flip involves parties acting together to defraud a lender by inducing the lender to lend more money than the property is actually worth, usually by obtaining an inflated appraisal in connection with the second transaction. The fraud can involve other participants as well.

In addition to notifying the lender of the above situations, if you are asked to close a transaction where the "seller" named in the contract is not the record owner of the property, or the "buyer" named in the contract is not the person or entity that will ultimately acquire the property, please also follow these procedures:

1. Prepare a single commitment describing all applicable requirements and exceptions.

2. Schedule A: The commitment must show the name of the current record owner in Schedule A, not the intermediary.

3. Schedule B Requirements:

A. If the "seller" named in the contract is not the record owner of the property, the commitment must require two deeds to complete the transaction: one from the record owner to the intermediary, and another from the intermediary to the ultimate recipient. You must specify the names of the grantor and the grantee for each required deed.

B. If the "buyer" named in the contract is not the person or entity that will ultimately acquire the property, the commitment must require the disposition of the contract buyer's interest in the property by:

(i) the contract buyer assigning its rights under the contract to the ultimate buyer; or
(ii) the contract buyer acquiring the property and conveying it to the ultimate buyer.

C. The proceeds from the second transaction must not be used to fund the first transaction unless there is a written agreement or authorization letter signed by all parties, including the lender, describing the amounts funded from all sources and the ultimate recipients. To avoid delays, consider inserting the following requirement in the commitment, modified as applicable:

"If any funds, including any loan proceeds, from the ultimate sale from [name of intermediary] to [name of ultimate recipient] will be used to complete the [title of contract] between [name of record owner] and [name of intermediary], the Company will require authorizations signed by all parties, including the lender, describing the sources of all such funds and their ultimate recipients."

4. You must underwrite each transaction separately, in your customary manner (e.g., run searches on all parties).

5. HUD-1 Settlement Statements: Although there will be a single commitment, there must be a separate HUD-1 Settlement Statement for each transaction. All disbursements must be shown. Cross-reference the HUD-1 Settlement Statements with each other so that they accurately reflect the source and recipient of all funds. Obtain the lender's written approval of both HUD-1 Settlement Statements before closing the transaction.

As with any other transaction, you must follow the lender's written closing instructions. Many lenders' closing instructions prohibit the closing of a transaction if there is an additional pending conveyance at the time of the closing or if there has been a conveyance of the property within the prior six to twelve months. If you are aware that the situation is inconsistent with the lender's written instructions or if you are otherwise unable to comply with them, contact the lender immediately and obtain its written authorization before closing the transaction.

As a reminder, you must carefully document the identity of all parties using government-issued picture identification.